I will be traveling abroad tonight thru next week so my writings until April 3rd will be much more sporadic.
So this is what it comes down to for the US economy and markets? Either the US government takes on another $7-8 trillion of obligations in uninsured deposits or the ship goes down? A country that has almost 250 yrs of history and has dealt with many banking crisis but always found a way of saving it without having to backstop all the deposit liabilities of the banks? There must be some other imaginative things we can do here instead like tweaking bank accounting that would allow more M&A as after all we do have more than 4,000 banks. Encourage more interest rate hedging so banks are better insulated against nasty marks on risk free holdings if held to maturity. Encourage every insurance company to start writing insurance policies for those that want to have uninsured deposits. Why should those with insured deposits pay the insurance for someone who doesn’t? We will have SUCH an undisciplined banking system, that will ALWAYS still have failures, if we a 100% back stop of every single deposit. And please to the hedge fund people that keep tweeting that the end of the world is here if there is not a blanket deposit, stop tweeting fear.
Now that the debate on how more rate hikes the Fed has left is pretty much over, we need to shift to two other things. Firstly, lets get more details from them on QT. Powell was asked just one question on it yesterday and he basically answered vaguely that it will continue on. Well, what is their goal with what level of reserves they would be comfortable with? Will they include the size of the RRP when making this calculation? This is not like watching paint dry and the deeper QT gets, the more accidents will occur but that balance sheet does need to get smaller.
Secondly, what’s the economic implications of what is unfolding here? Earnings season ahead will give us a pretty good feel but the only debate here is the breadth, deepness and extent of the recession, now exaggerated by the credit crunch headed our way. And, to what extent will the Fed be able to cut rates in response, hamstrung by still the cloud of inflation, even if moderating.
The US dollar proved again yesterday that it is in concert with expectations of Fed policy as its only driver. The euro/yen heavy DXY closed Wednesday just 1 pt from the weakest level since last April. And gold is trading just off its highest level since last April. Did I mention before that I’m bullish on gold and silver?
Gold in orange and DXY in white
Following the ECB and Fed rate hikes, the BoE is likely to raise 25 bps at 8am est and we saw this morning rate hikes from the Swiss National Bank by 50 bps to just 1.5%, Norway by 25 bps to 3%, Taiwan unexpectedly by 1/8 to 1.875% as is their typical cadence and the Philippines by 25 bps to 6.25%.
Considering everything going on in markets, there wasn’t much of a change in stock sentiment w/o/w. Yesterday II said Bulls fell to 39.7 from 40.3 while Bears rose 1 pt to 28.8. Bulls rose 1.7 pts to 20.9 in the AAII read while Bears were little changed at 48.9. The CNN Fear/Greed index closed at 36, smack in the middle of the ‘Fear’ category. I’d call all of this in aggregate, no man’s land, though it’s clear that the mood is still tepid.